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No escape from biggest bond loss in decades as Fed continues to hike rates

(Bloomberg) — Investors who may have hoped that the world’s largest bond market will quickly bounce back from its worst losses in decades seem doomed to disappointment.

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Friday’s U.S. jobs report came despite escalating efforts by the Federal Reserve to slow the economy as companies rapidly added jobs, raised wages and added more Americans to the workforce. It shows economic momentum. Treasury yields fell as numbers showed a slight easing in wage pressures and rising unemployment, but the big picture is that the Fed is poised to hold and maintain rate hikes until inflation spikes subside. strengthened the speculation.

Swap traders expect the central bank to continue raising the benchmark rate by three-quarters of a percentage point on Sept. 21, to tighten policy to around 3.8%. With 10-year Treasury yields hitting or exceeding the Fed’s peak rates in past monetary policy tightening cycles, this suggests that bond prices could fall further. Its yield is currently around 3.19%.

Kelly Debs, a certified financial planner at Mainstreet Financial Solutions, said inflation and the Fed’s hawks “bite the market.” “And inflation isn’t going away in a few months. This reality bites.”

The U.S. Treasury market will drop more than 10% in 2022, its biggest loss of the year, according to Bloomberg indexes, catching up to the pace of consecutive declines for the first time since at least the early 1970s. The rally that began in mid-June, fueled by speculation that a recession would lead to rate cuts next year, was all but quelled as Fed Chairman Jerome Powell stressed his focus squarely on lowering inflation. rice field. His two-year US Treasury yield on Thursday hit 3.55%, the highest since 2007.

At the same time, short-term real yields, or expected inflation-adjusted yields, have risen, indicating significantly tighter financial conditions.

Rick Ryder, chief investment officer of global fixed income at BlackRock, the world’s largest asset manager, believes long-term yields could rise further. He said in an interview with Bloomberg TV on Friday that he expects a 75 basis point hike in the Fed’s policy rate this month.

Markets breathed a “sigh of relief” as job growth slowed in Friday’s labor report, Rieder said. His firm is buying some short-term bonds to capture a big jump in yields, but he thinks longer-maturity bonds have more upside.

“We can see interest rates going up in the long run,” he said. “I think we are in the range.

The jobs report was the last major survey of the job market before this month’s meeting of the Federal Open Market Committee.

Several economic reports are due in the coming week after the shortened holiday period, including a survey of purchasing managers, a Fed beige book that gives a glimpse of the situation in the region, and weekly numbers on unemployment benefits. US markets are closed on Monday for the Labor Day holiday, and the most important indicator before the Fed meeting is his September 13th CPI release.

But the market will be scrutinizing comments that a range of Fed officials, including Cleveland Fed President Loretta Mester, are expected to speak publicly next week. She said on Wednesday that policymakers will need to push the federal funds rate above 4% by early next year, indicating she does not expect rates to be cut in 2023.

Greg Wilensky, head of U.S. fixed income at Janus Henderson, said he is also looking at wage data from the Atlanta Fed ahead of its next policy meeting. On Friday, the Labor Department reported that his average hourly wage rose 5.2% in August from a year earlier. That was slightly below economists’ expectations of 5.3%, but still suggests that a tight labor market is putting upward pressure on wages.

“I’m in the 4% to 4.25% camp on final rates,” Wilensky said. “People are starting to realize that the Fed won’t pause on weak economic data unless inflation has abated dramatically.”

Fears of aggressive Fed tightening have also hit stocks, with the S&P 500 index down more than 17% this year. U.S. stocks recovered from their June lows until mid-August, but then regained much of their gains as bets on impending recession and his 2023 rate cut unwound. I was.

“We need to remain humble about our ability to predict the data and how interest rates will react,” said Wilensky, whose major bond funds continue to be underweight Treasuries. “The worst is over as the market is pricing more reasonably where interest rates should be. But the big question is what’s going on with inflation.”

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